Bank Of England Scraps Mortgage 'Affordability Test' In Boost To First Time Buyers

The Bank of England has axed its 'mortgage affordability' test, it has been announced.

Anyone who has tried to get their foot on the property ladder in recent years will know how impossible the process can seem. One of the many obstacles in the way of would-be-homeowners is the stress test put in place as part of a bank's assessment of mortgage applicants.

Since 2014, the affordability test has been used to determine whether someone would able to repay their mortgage if interest rates rose by 3 percent.

At the time, it was introduced to make sure people didn't take on more debt than they could realistically afford.

However, under the current situation, rising interest rates coupled with the standard variable rate offered by lenders would have meant applicants having to be able to pay around seven percent.

Alamy

Speaking about the decision to abandon the test, the Bank of England's Financial Policy Committee (FPC) said: "The LTI flow limit without the affordability test, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) responsible lending rules, ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.

"The withdrawal of its affordability test Recommendation does not place any new requirement on lenders to take action, as existing affordability assessment practices are already subject to the FCA’s MCOB framework and will remain so."

Laurence Bowles, director of research at Savills, said he believes the change will be a boost for first time buyers.

He told the Evening Standard: "It should allow lenders to be slightly more flexible which will come as welcome relief to some would-be-buyers struggling to keep up with current criteria because of significant price growth of the past two years — but saving for a deposit will remain the most significant barrier to home ownership."

Alamy

Chris Sykes, from the mortgage broker Private Finance, also backed the move.

He said: "Just because the recommendations change it doesn’t mean that banks will automatically change the way they look at things; they still have a duty of care, have to be seen to be lending responsibly and also have their own internal risk committees that they would need to get any changes by.

"What this will allow is for additional discretions or innovations by lenders. Perhaps it could inspire some lower stress rates for those that need it most with low income but with perfect credit and years of experience paying their rent."

Critics of the move, however, have questioned whether it is wise at a time when millions are being stretched by the cost of living crisis to allow buyers to borrow more money.

Alamy

Gemma Harle, the managing director of Quilter Financial Planning told the Guardian that she thought the move was 'baffling'.

"The timing of today’s announcement that the Bank of England is going to loosen its affordability rules is somewhat baffling and may enrage some who still have the financial crash burned into their memory," she said.

"With interest rates starting to creep up to meet the damaging impact of inflation and soaring energy and food prices, you would think that people’s ability to afford their mortgage should really be under the spotlight now."

Ms Harle was glad to hear, though, that the Bank of England was sticking by the loan-to-income (LTI) 'flow limit', which was also introduced in 2014.

The LTI limits the number of mortgages offered to borrowers at LTI ratios of 4.5 or greater.

She added: "While it is potentially bad timing for the announcement, the change in the affordability rules may not be as significant as it sounds as the loan to income ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow."